While Southern Africa stands out as the most competitive region in Sub-Sahara Africa from an overall Labour Market Risk perspective, boosted by large labour pools and rising educational attainment levels, frequent bouts of worker strikes that disrupt production and the strong influence of labour unions expose businesses based in the sub-region to high labour cost risks. Over the medium term, labour regulations will likely remain rigid, underpinned by the prevalence of left-leaning labour market policies aimed at preventing job losses throughout Southern Africa. This together with the rising cost of living will continue to exert upward pressure on compensation requirements and limit the ability of businesses to downsize their workforce in times of necessity.

Botswana and Namibia are the top performing markets in the Southern Africa region in the BMI Labour Cost Risk Index, scoring 72.2 and 68.6 out of 100 respectively. They rank in first and second position respectively out of 13 countries in the region, and perform well above the global average of 51.4 out of 100. Namibia is the only country in Southern Africa without a statutory national minimum wage and has the least stringent requirements on severance pay for redundancy dismissal, which stands at only 5.3 salary weeks, on par with South Africa. This is in contrast to a regional average severance pay requirement of 19.3 salary weeks for Southern Africa and well ahead of the 69.3 average salary weeks required for Mauritius. Despite offering a generally attractive labour market environment, Mauritius's competitiveness is significantly undermined by the severity of the minimum statutory severance pay for redundancy relative to its peers, leading to a moderate score of 57.5 out of 100 for Labour Cost Risk, ranking fourth regionally.

With the exception of a few bright spots, the majority of which consist of small populations, labour cost risks are generally elevated across the Southern Africa region, particularly in the countries with larger labour pools. This is mainly due to the strong presence of labour unions, high unemployment rates and concomitant political considerations which result in rigid wage determination frameworks. Risks for businesses are compounded by the stringent statutory requirements on severance pay for redundancy notice periods prevalent throughout Southern Africa. Zambia, Mozambique, and Zimbabwe are key regional underperformers with less competitive positions on severance pay and labour productivity wage metrics which contribute to their lower scores of 43.7, 38.2 and 26.6 respectively out of 100 for Labour Cost, such that they rank in 10th, 12th and 13th position regionally.

South Africa's labour market is rendered unattractive by the inflexibility of wage determination owing to extensive labour regulations that increase compliance burdens, and powerful trade unions which raise the potential of labour unrest and disrupt production, particularly in the mining and transport sectors. In addition, according to the World Bank, South Africa has the third highest minimum wage in Southern Africa of USD285.50 which, despite being globally competitive, is above the regional average of USD174.60. This contributes towards South Africa having an uncompetitive score of 48.5 out of 100 for Labour Cost Risk, ranking in the eighth position regionally ( see 'Battle Over Minimum Wage A Sign Of Things To Come', May 11 2018).

High Indirect Labour Costs Weigh Down Industrial Competitiveness

Businesses in Southern Africa are unable to seamlessly adjust the size of their workforce in response to economic shifts due to high compensation requirements as shown by above average severance package requirements for redundancy dismissal compared to the other major sub-regions in Sub-Saharan Africa (SSA). This undermines the competitiveness and viability of operations in mining, manufacturing and other labour-intensive industries, particularly during economic downturns, as seen in the global commodities slump in recent years. In addition, the strength and prevalence of regional labour unions, particularly in the mining and industrial sectors, mean that wages are not competitively determined by supply and demand forces which increases the risk of firms incurring sub-optimal labour costs.

Although there are variations within Southern Africa, the sub-region's minimum statutory severance pay, measured in salary weeks, is generally higher compared to other regions within SSA. On average, the minimum statutory severance pay in Southern Africa is 19.3 salary weeks with a standard deviation of 12.3 weeks. This is higher than the other regions in SSA: West Africa (16.8 weeks), Central Africa (12.9 weeks) and East Africa (8.7 weeks).

This is in part underpinned by the comparatively high average rate of unemployment in Southern Africa, which signals that the employment regulations will likely continue to seek to minimise job losses in the medium term. While the average redundancy notice period for Southern Africa is competitive by SSA standards at 5.2 weeks, the high associated compensation costs prohibit businesses from easily rationalising their expenses and resizing the workforce, especially in times of financial stress when it is required the most. Meanwhile, the continued presence of large and often politically-active labour unions throughout the region also limits the flexibility of wage determination and raises risks of large-scale disruptive strikes in key sectors.

Rising Cost Of Living To Exert Upward Pressure On Wages

Southern Africa - Consumer Price Index (Select Countries), 2014-2022

Source: BMI

We hold a bearish outlook on labour cost risks within the Southern Africa region over the next decade. Mounting pressure on minimum wages as regional policymakers seek to address poverty and inequality will set average wages on an uptrend in US dollar terms. In addition, with rising global energy costs and regional inflation trends over 2018-2022, the increasing cost of living is likely to erode the purchasing power of employees. These twin effects will drive labour unions, particularly in the mining and industrial sectors, to ramp up demands for higher wages in the near term. The table below gives brief summaries of the labour cost profiles for a few select markets within the Southern African region.

Southern Africa- Key Labour Cost Risk (Select Countries)

Source: BMI

Economy Labour Cost Highlights Labour Cost Risk Level

Botswana

Minimum wage: USD84.50

Severance pay (in salary weeks):16.8

Redundancy notice period (in weeks): 3.8

Paid annual leave (working days, average): 15

Low: Despite having sound hiring and firing practices, labour-related disputes in Botswana are frequent, particularly in the extractive and construction sectors.

Labour costs are rising as a result of high severance-related liabilities and rising average wages that increasingly face upward pressure due to the rising cost of living and the significant bargaining power of labour unions.

Mauritius

Minimum wage: USD236.8

Severance pay (in salary weeks): 69.3

Redundancy notice period (in weeks): 4.3

Paid annual leave (working days, average): 17

Low: Firms based in Mauritius benefit from the country having flexible hiring and firing practices as well as a low likelihood of strike action disrupting production.

Nevertheless, Mauritius has the highest mandatory severance pay for redundancy within the Southern Africa region which means that the high cost of compensation can make it difficult for businesses to downsize their workforce.

South Africa

Minimum wage: USD285.5

Severance pay (in salary weeks): 5.3

Redundancy notice period (in weeks):4.0

Paid annual leave (working days, average): 18

Moderate: South Africa's labour market is rendered unattractive by its inflexible labour regulations, which increase overall costs for employers due to onerous compliance burdens.

Moderate: Businesses in Zambia should expect higher labour costs and frequent disruptions to production in the medium-to-long term on account of increasing labour unrest and the strengthening power of labour unions in the country.

Risks are elevated in the mining sector, which has seen frequent strikes in the recent past mainly related to pay increases, benefits and working conditions.

Additionally, rigid labour laws in Zambia limit the ability of employers to adjust their workforces, particularly during economic downturns, as seen during the slump in copper prices.

Mozambique

Minimum wage: USD103.4

Severance pay (in salary weeks): 33.2

Redundancy notice period (in weeks): 4.3

Paid annual leave (working days, average): 24

High: Mozambique is regionally uncompetitive on account of the high severance pay requirements as well as inflexible hiring and firing practices.

Businesses operating in the country also have to contend with extensive national minimum wage regulations as well as low levels of productivity relative to wage costs.

In the near term, the rising cost of living will also continue to exert significant upward pressure on salary requirements.

Zimbabwe

Minimum wage: USD305.4

Severance pay (in salary weeks):12.3

Redundancy notice period (in weeks): 13.0

Paid annual leave (working days, average): 22

High: Zimbabwe is unable to compete with its regional peers in terms of employment costs with rigid labour market regulations exacerbating risks for businesses.

Firms in Zimbabwe will find it difficult to adjust the size of their workforce in response to economic changes due to costly severance pay packages and time-consuming employee termination procedures. The latter has been a key feature of many company closures and we expect this trend to persist over the short-to-medium term.

A further challenge for businesses in the country is that wages are denominated in US dollars. The lack of hard currency in the market, however, means that it will be difficult for businesses to remunerate workers, even more so for those workers that require cash payments.